In the first half of this year, several regional banks in China have reported a substantial increase in investment income, even as their core lending activities have struggled. This trend reflects the broader economic challenges and slow monetary policy transmission, which are driving banks toward bond trading as a revenue source.
Significance of the Shift
Despite Beijing’s efforts to stimulate the economy amid a property sector downturn and weak consumer spending, Chinese banks continue to face issues such as tight profit margins and low loan rates. Rural commercial banks, initially established to support small businesses through lending, are increasingly turning to bonds and other financial assets, diverging from their original mission.
The flight to bonds by funds and retail investors has led to concerns about a potential market bubble, prompting regulatory warnings.
Financial Overview
According to financial statements, Suzhou Rural Commercial Bank and Zhangjiagang Rural Commercial Bank saw their investment income surge by 116% and 176%, respectively, in the first six months of this year compared to the same period last year. In contrast, their net interest income—traditionally their primary revenue source—decreased by 7% and 12%, respectively.
Investment income now makes up approximately 30% of the total revenue for both banks, a notable increase from the low teens in 2021. This growth is primarily attributed to the sale of debt investments and financial assets held for trading.
Expert Insights
Elaine Xu, Director of Asia-Pacific Financial Institutions at Fitch Ratings, noted that rural commercial banks, particularly in economically weaker regions, are encountering heightened asset quality and profitability challenges. Xu explained that loan growth for these banks has slowed significantly this year due to reduced loan demand and increased competition from larger banks, which are now dominating loans to micro and small enterprises.
To mitigate the pressure on net interest margins, some banks have adopted a more aggressive investment strategy, focusing on trading financial assets.
